USA, Argentina and Alan Beattie: Wrong Starting Point. Act II

I appreciate that Alan Beattie took time to comment on my blog. He mentions that he does not find my critique of the book very convincing. It is clear from my blog that I was referring to the article (http://www.ft.com/cms/s/2/778193e4-44d8-11de-82d6-00144feabdc0.html). When I read the article I was disappointed and decided not to buy the book. His answer to my comments in this blog has not changed my original disillusionment. So if he says that something in the book is presented in a more careful and reasoned way than the article, I am not going to be in the position to dispute it. Here, however, I will focus on the article, as was the case with the previous blog. The quotations are mostly from the article, but in a couple of cases they come from his answer in this blog; when the latter is the case I will mention it.

1. Alan Beattie’s first counterargument is that I use total GDP and population to argue that the starting point of his analysis is wrong, because in his book he uses GDP per capita. Again, as I was talking about the article, I think his point is misleading: the FT piece is titled “Argentina: The superpower that never was”, and the article opens with the image of a hypothetical Argentina that is attacked as in the tragic 9/11 while a fictional US is crushed by debts. Let’s leave aside the issue that Argentina was in fact attacked twice by terrorism in the 1990s, and it is not something that I would take lightly just for the sake of journalistic hyperbole. Here my point is that the argument developed by Alan Beattie gives the clear idea that, in his mind, “the countries were dealt quite similar hands…” and so on. If he wanted to present his analysis in per capita terms, I would have been more careful with how the argumentation was presented. Beattie asks “Would you consider China’s economy to be more successful than Singapore’s because it is bigger in absolute terms? I think this is a bit silly.” The point is that even though Singapore has a high GDP per capita no one would consider that country a “superpower” in the category of China, which is the image that he is conveying in his article. Bottom line: if you want to argue in per capita terms you should not start talking about superpowers.

2. Alan Beattie in the same section argues “The US is physically bigger than Argentina. No kidding. So what?” Let me tell you what: I was arguing that the US was far bigger in terms of the whole economy and population, which define the extent of the market, and, consequently, the possibility for specialization and increases in productivity, as shown long time ago by Adam Smith. Argentina’s domestic market in the formative XIX century was always smaller, and therefore could not lead to the same capitalist development (leaving aside other issues of endowment, in which the US has always had greater advantages).

3. Let’s move to the issue of the GDP per capita, which I agree with Alan Beattie is an important one (although, as I argued in 1, it is not the image he was projecting in the article). In his story the US did consistently right what Argentina did wrong (there are several factual mistakes tough, like when he says that the US suffered less and recovered faster from the 1930’s Great Depression, when historical data shows the opposite; he also argues that the ratio of Argentina’s exports to GDP had shrunk to “just 2 per cent of its national income. In the US, by 1970, the equivalent figure was nearly 10 per cent and rising fast“; according to WDI World Bank data, Argentina’s X/GDP was on average 6.5% and 7.3% in 1960s and 1970s against 5.2% and 7.5% for the US, and the percentage was rising as fast as in Argentina: in the 1980s the numbers were 8.8% for Argentina and 8.5% for the US).

If that pattern of divergent policies held for the many decades that Alan Beattie wanted to cover with his story, and if the two countries were similar when they started, then you should expect a continuous deterioration from a common starting point. In the next Graph I plot Argentina and Australia GDP per capita as percentage of the US (data is from Angus Maddison, as in the previous blog). It is important to have a point of comparison and many people have argued (and I agree) that Australia is the best benchmark.

Annual data goes from 1900 to 2003. There are two point estimates for 1870 and 1890: then Argentina was 53.6% (1870) and 63.4% (1890) of the US GDP per capita, and Australia, 133.9% and 70.1%, respectively. Several things are worth mentioning (I drew some indicative trends, to help visually with the data):

a) Argentina and the US did not have comparable starting points at least since 1870; also Australia has always had a bigger GDP per capita than Argentina, and, at times, it surpassed the US (next potential article “Australia: the superpower that could have been?”).

b) Although in different plateaus, and with cycles, Australia and Argentina percentages with respect to the US GDP per capita stayed around a flat trend from 1900 to the very early 1940s.

c) The growth spurt of the WWII significantly increased the US economy (according to BEA data, it doubled in size between 1939 and 1944) and Australia and Argentina both lost ground, but then began to catch-up (the trend is upward) although they never reach pre-WWII levels; also the catch-up trend is somewhat faster for Australia than for Argentina.

d) The Australian and Argentine economies behaved similarly until about the mid 1970s; if you want to get somewhat geekly technical, both variables seem cointegrated; in fact they pass the Johansen test for cointegration (I ran it) if you consider the period 1900-1975.

e) Finally, the big divergence started in the mid-1970s, as I mentioned in the previous blog; not surprisingly the variables do not pass the test for cointegration if you include the period 1976-2003.

Point d) suggests that whatever happened in (or to) Argentina with respect to the US, was also having influence in (or affecting to) Australia. Alan Beattie’s piece does not seem to consider other things than the policies of the US and those of Argentina. The cointegration of Argentina and Australia suggest common factors different from Argentina’s policies up until the mid 1970s (except if you are willing to argue, which does not seem right, that Australia followed exactly the same policies as Argentina). Moreover, the crucial fact to explain is the decline since the mid-1970s in Argentina (point e), but Alan Beattie’s story mixes decades in a way that does not help understand the problems of Argentina in the last decades, which seem the crucial ones.

4. Let me go to the second point he makes: that I assume that migration is exogenous. Leaving aside the somewhat imprecise phrasing (the immediate question is “exogenous with respect to what”?), my point was that the agrarian structure in Argentina in the XIX century was mostly determined by stronger structural factors, which conditioned policy. Before I go on, let me say that I do agree with Alan Beattie’s characterization of the non-developmental behavior of the landed classes in Argentina. But Alan Beattie’s anthropomorphic explanation that “Argentina delivered it into the hands of a few rich landowners” is not very illuminating. He says that he recognized the fact “that Argentina started off with a smaller population/land ratio when it settled the frontier (“…the country had to push forward its frontier with a skeleton staff”) (from blog).” But he does not draw the right conclusions, which is the land was divided early among few people, and therefore a more concentrated land structure was established too soon in Argentina, because there was not the same level of population pressure as in the US. In the latter country a larger number of people generated the pressure on the land, and the policies, that led to a more egalitarian structure. The ranchers of the US wanted to expand their land as much as the ranchers in Argentina, but they were limited by the large presence of homesteaders, which made sure the US Congress and Executive had to take them into account (see for instance, Property rights and Land Conflict: A Comparison of Settlement of the US Western and Brazilian Amazon Frontiers” Alston, Libecap and Mueller, in Coatsworth and Taylor “Latin America and the World Economy since 1800”).

There was not such population pressure at the time the agrarian structure was formed in Argentina. The larger waves of immigration in Argentina came later, but the land was already taken and the domestic market in Argentina was far smaller than the US and unable to support an equivalent industrial development. Over time, the pressure of that expanded population led to progressive democratization and the breakdown of landed elite control, brought about by the political movements led by Yrigoyen and Perón. I mentioned in my blog Barringotn Moore’s book, where he showed the importance of agrarian structures for the development of capitalism and democracy. But Alan Beattie has the timing wrong, and seems to have a naïve view of human behavior like when he says in the blog (not the article) that the landed elite “chose not to distribute land more equally.” Of course they did not- as much as the slave owners of the US south did not choose to free their salves. A bloody Civil War had to be fought for that to happen (by the way Argentina abolished slavery in 1813, as well as Indian forced labor).

The breakdown of a restrictive agrarian structure took longer and followed a different path in Argentina. Certainly this is not (or should not be) an issue now and I believe the conditions for a strengthened democracy and a buoyant domestic market are present now (if we decide to make it work).

5. Let me focus on a last point, which also refers to some of the structural reasons why less people came to Argentina at the time the agrarian structure was formed. Alan Beattie argues in the blog that “the initial lower population/land ratio in Argentina should have meant higher relative returns to labour and hence much more rapid immigration to Argentina than to the US for the remainder of the nineteenth century, but it did not.” This does not seem correct. What counts is not the physical ratio but the economic ratio, which depends on the type and levels of production from a hectare (even if they are physically equal), which in turn depends on the market for your products. It is clear that a farmer in the US was producing a greater variety of products, of a higher value, and for a larger and expanding market, while Argentina had a much smaller domestic market, and the exports were limited by distance and, in the case of high value products, such as beef, they had to wait for improvements in refrigerated transport (which happened late in the XIX century). Therefore, event though the physical hectare may have been comparable in the US and Argentina, the economic return per hectare was not. In fact comparative data in John Williamson’s web site (http://www.economics.harvard.edu/faculty/williamson/files/1853appendix.pdf ) show that real wages at PPP exchange rates were clearly lower in Argentina than in the US during all 19th century (and afterwards of course). And this is another structural reason why migration between 1820/40 towards the US was five times larger and started earlier than in Argentina.

In summary, I stand by my conclusion of the previous blog: Alan Beattie’s story confuses more than illuminates if you want to understand what happened in Argentina over the last century.